Service Enterprise Activities Policy

A service enterprise activity provides, at approved rates and on a regular and continuing basis, goods or services to a wide variety of campus departments, rather than to individuals. Typically, a service enterprise will have only incidental non-UC income.

The FAQ document is an integral part of this policy document and includes detailed procedures.

A service enterprise activity provides, at approved rates and on a regular and continuing basis, goods or services to a wide variety of campus departments, rather than to individuals. Typically, a service enterprise will have only incidental non-UC income. Service activities frequently use contracts referred to as service agreements. A service agreement is a written legal agreement between the University and a non-UC source containing terms and conditions under which goods or services are to be furnished by the University. Service agreements must be signed only by persons having UCSD contracting authority.

Prior to the establishment of a service enterprise activity, the need for such goods or services must be identified which, if provided at a reasonable cost and at a convenient location, would enhance and support the University's instructional, research or public service programs. There must be a regular and continuing demand by departments for the goods or services to be provided by the enterprise. The demand must be significant, both in dollar amounts and number of transactions. The benefits, including relative prices and quality, of the proposed activity providing goods or services must be weighed against the benefits of obtaining similar goods or services from commercial sources or other University sources.

Goods or services should not be sold to the general public unless the goods or services are unique or sales will not compete with commercial sources. University facilities are not to be used for tests, studies, or investigations of a purely commercial nature except when it is shown conclusively that satisfactory facilities and such services do not exist elsewhere.

If it is anticipated that the activity may generate unrelated business income, e.g., related to the sale of goods and services to the general public, the potential tax liability also must be considered in planning and budgeting for the activity.

A recharge rate proposal must be submitted and approved at the proper levels prior to the start date of a new rate or activity. In some instances the activity may be retroactively approved to a date not preceding the beginning of the current fiscal year.

Proposals for activities with projected annual income of $250,000 or more are sent to the Recharge Rate Review Committee and the campus controller for their review and approval. Proposals for activities with projected annual income of less than $250,000 are reviewed and approved by the Chair of the Recharge Rate Review Committee on behalf of the full Committee and on behalf of the Controller. For Facilities Design and Construction rates the methodology must be approved annually by the Recharge Rate Review Committee.

The Recharge Rate Review Committee is comprised of a Chair and a member of each of the Vice Chancellor areas. The Recharge Rate Review Committee chairperson or designee reviews proposals for compliance with Office of Management and Budget (OMB) Circular A21, Cost Principles for Educational Institutions.

Costs incurred and assigned to the activity must be essential to the purpose for which the activity was established. These direct costs, also known as operating costs, are defined as all readily identifiable costs associated with the furnishing of goods or services, except for incidental administrative support such as clerical and secretarial assistance or minimal supervisory assistance that is not significant in time or dollar value, benefiting a single period. These costs include but are not limited to wages, wage-related costs, supplies, materials, equipment maintenance and equipment depreciation. Training costs that are specific to the activity are allowed. However, training costs to create new goods/services are not allowed in the operating fund because to do so, would be charging users for services/goods not yet rendered. Non-current expenditures, such as for equipment acquisitions or facility modifications, cannot be charged to a service enterprise activity's operating fund. Fees and stipends for undergraduate and graduate students cannot be charged to the operating fund.

Some activities buy capital equipment using an APPROVED installment contract/lease (must be processed through Procurement and Contracts). Interest expense for capital equipment is considered to be a direct cost of the operation. However, principal payments must be paid from Renewals and Replacements funds or from some other funding source, such as Vice-Chancellor’s discretionary funds.

The mark-up cost is an increase above the original purchase price of materials. In certain activities such as machine shops, a handling fee for the cost of materials is appropriate. The mark-up percentage is normally computed by dividing the total materials processing costs by the total materials cost. Materials processing costs usually consists only of the cost of salary and benefits of the person(s) involved in ordering, receiving, etc. of materials but could also include related costs such as computer, telephone, etc.

Start-up costs are non-recurring costs necessary to prepare a new activity for its normal business purpose. Start-up costs may include both capital expenditures, such as those for equipment, and non-capital expenditures, such as moving expenses. Start-up costs that benefit more than one year must not be charged to the operating fund of the recharge activity and must be funded by discretionary funds. The start-up costs may be recovered through amortization. Generally, the amortization period should be five years or the number of years benefited by the cost.

Payroll costs will be based on a reasonable estimate of productive hours which is the number of hours per employee which annually can be directly attributed to the provision of goods or services. This excludes the hours allowed for vacation, holiday, sick leave, jury duty, military leave, and clean-up activities. The effective labor billing rate would be the sum of wage and wage-related costs to be recovered divided by the number of productive hours.

Rates will be based on standard cost accounting methods and will be based on allowable costs. Rates will be stated in measurable units of goods or services. A separate rate should be established for each class of goods or services provided. All users of goods and services must be charged at established rates.

Rates should not be based on prorations or other overhead methods of cost allocations, unless the method is a calculation of unit costs supporting the goods and services provided, and the rate(s) is(are) approved by the Recharge Rate Review Committee. Rates must have an auditable basis. For example, a 25% mark-up for materials without any basis would not be allowed. Unless specifically approved by the Recharge Rate Review Committee, fixed-price jobs will not be quoted or billed to either university or non-university users.

The rates, including rates for non-UC users, of service enterprise activities are subject to review by the Recharge Rate Review Committee. All activities will publish a schedule of approved rates and prices.

Any relief to UC users of recharge activities, such as a subsidy for instructional use of computers, should be provided through a central allocation of discretionary funds to the users which will permit the recharge activity to charge the established rate for goods or services based on its full costs. Unless specifically approved by the Recharge Rate Review Committee, rates charged to non-university users are not to be subsidized in any manner. There may be exceptions caused by Federal grant stipulations. Certain recharge activities are subsidized by Federal grants which pay specific costs, such as salaries, for the recharge activity. However, the Federal grants specify that only certain users may benefit from the subsidy, causing tiered rates.

Recharge activities will be operated on a no-gain/no-loss basis. Any surplus or deficit occurring in any one year will be corrected by adjustment of rates in the succeeding year to achieve a break-even balance at the succeeding year end. Every effort should be made to ensure that year-end surpluses or deficits do not exceed one month of the recharging unit's expenses. The adjustment of rates will generally be based on estimates since actual performance data for the year will not be available prior to the development and publication of the succeeding year's recharge rates. In exceptional cases when such an adjustment would create a severe fluctuation in rates from one year to the next, achievement of a break-even balance can be extended for a reasonable period beyond the succeeding year upon approval by the Recharge Rate Review Committee. The Recharge Rate Review Committee may also approve the maintenance of surpluses in excess of one month of the recharging unit's activity when appropriate. Accordingly, the Recharge Rate Review Committee has agreed upon using two months of the recharging unit's activity for surplus balances.

All service enterprises activities must notify Business and Financial Services-General Accounting (BFS-GA) via email of unacceptable surplus or deficit balances by October 1st following the fiscal year and provide an explanation and a business plan to correct the balances. Those activities that have an unacceptable surplus or deficit balance as June 30th and have not sent an explanation to BFS-GA by October 1st following the fiscal year, will be subject to scrutiny by the Recharge Rate Review Committee. BFS-GA will send after October 1st a listing of all those activities not in compliance to the Recharge Rate Review Committee and a copy to the activity's financial contact. If no response is received from the activity's financial contact within 30 days of notification to the Recharge Rate Review Committee, the listing will be sent by the Recharge Rate Review Committee coordinator to the respective Vice Chancellor’s Office.

Requests to change rates of established activities, or requests to add rates for new goods or services of established activities must include a recharge rate review proposal. Follow the same approval procedures as for new activities.

Rate changes due to HR approved payroll adjustments such as merit, reclassification cost of living, range and equity adjustments and UCRP contributions are automatically approved. The department will notify the Recharge Rate Review Committee coordinator and BFS-GA of the rate changes and be able to provide the rate calculation worksheets in the event of an audit.

Rate changes due to increases/decreases in the differential rate are automatically approved.

Goods sold to the general public may be subject to California sales tax.

Unrelated business income is a type of income resulting from sales of goods or services to individuals or non-University entities. If sales are not substantially related to University educational or research purposes, proceeds from the sales are considered to be unrelated business income and are subject to Federal income tax reporting requirements. Examples include income from sales by machine shops to the general public.

In accordance with Business and Finance Bulletin A-59, “Costing and Working Capital for Auxiliary and Service Enterprises”, federal costing regulations define certain costs as unallowable as a charge to federal funds. Inclusion of funds accumulated for capital asset replacement in excess of depreciation on current equipment, and accumulated surpluses will require refunds to the federal government. The federal government will not accept any markup above cost, even if the purpose of that markup is to accumulate funds for equipment replacement or addition or for inventory expansion. Therefore, at the end of each fiscal year, those activities which provided services to federally-funded contract and grant activities will prepare a statement of costs that excludes interest expenses except for capital equipment lease purchases, accumulation of funds for capital asset replacement in excess of depreciation expense for currently used assets, and accumulated surplus balance in excess of one month of the recharging unit’s activity. The difference between such a statement of costs and the revenues actually generated is considered excess pricing by the federal government. The portion of the difference which can be attributed to federal contract and grant activities will be refunded to individual active grants and contracts or in lump sum to the U.S. Treasury.

Federal costing regulations do not allow interest costs (except for capital equipment lease purchases), working capital or capital costs to be charged to federal users. There are two alternate ways to comply with federal costing regulations:

Establish dual-pricing structures for federal and non-federal activities (this can be accomplished by rebating the federal users); or

Instruct federally-funded activities not to make use of certain service activities

The overhead cost recovery rate, also referred to as differential income, is the rate applied to all sales to non-UC users of activities in order to recover the indirect costs related to the activity. Rates are based on the current Federal negotiated research rate for the campus, less four components: Equipment Depreciation, Sponsored Project Administration, Library, and Student Administration & Services. In the case where a particular sales/service activity involves the resources of, or results in administrative burden/cost to, Sponsored Project Administration, Library or Student Services, the affected components should not be excluded. The activities must, at minimum, charge non-UC users the standard overhead cost recovery rates. The standard rates are for:

Campus - If a sales/service activity is located in campus space, the campus differential rate will be added to sales to the general public.

Off-Campus - If a sales/service activity is located in space that is not owned or maintained by UC, an off-campus differential rate will be added to sales to the general public.

Ship Use - If a sales service activity is affiliated with the ship-use operation, with no space costs and all departmental support costs factored into the charge rate, a ship use differential rate will be added to sales to the general public.

The standard distribution for overhead cost recovery generated is as follows:

Full Differential Income Distribution

Activity Location

Central Administration

Departmental Support

Full Differential Income Rate

On Campus

16%

+

29%

=

45%

Off Campus

8%

+

14%

=

22%

Ship Use

6%

+

12%

=

18%

Minimum Differential Income Distribution*

Activity Location

Central Administration

Departmental Support

Minimum Differential Income Rate

On Campus

16%

+

0%

=

16%

Off Campus

8%

+

0%

=

8%

Ship Use

6%

+

0%

=

6%

In most cases, the Differential Income is to be distributed in two parts:

(1) central administration and (2) departmental support or to the Vice Chancellor responsible for the activity. When an activity has obtained approval from its Vice Chancellor to charge the minimum overhead rate for non-UC sales, the central administration portion must be remitted annually.

*The table on minimum Differential Income distribution lists only the minimum Differential Income that is required for central administration. Each Vice Chancellor area may also require a minimum Differential Income portion to be remitted to the Vice Chancellor responsible for the activity. Consult your Vice Chancellor's office for more information.

Differential income in excess of the standard rate will be distributed to, or as directed by, the Vice Chancellor responsible for the activity that generated the overhead cost recovery.

In certain circumstances, such as collaborative programs, there may be multiple differential income rates for profit and non-profit entities. However, the differential income rate cannot be less than the standard differential income rate.

Differential Income Waivers:

Generally, waivers requests are approved for the activity's Vice-Chancellor's (Departmental Support) portion only. The central administration portion must still be collected and remitted.

Differential Income Exemptions:

For new activities, the classification process will determine the appropriate overhead rate, if any. If an external entity prohibits payments for overhead, the activity must produce documentation that demonstrates this exemption.

Use of Differential Income Funds:

Funds representing differential income, which are distributed to an activity's differential income reserve, cannot be used to fund operating costs of the activity; however, these funds may be used to fund non-operating costs, such as equipment and capital improvements of the activity. With the approval of the cognizant Department Chair or Administrative Unit Head, such funds also may be used for operating costs of the department or unit, other than those of the activity itself. Although differential income funds can’t be used to fund the operating costs of the activity, they can be used to subsidize the UC users of the activity.

A service enterprise activity will have a specific fund number. Each activity will be assigned a unique fund number in the appropriate COA series by BFS-GA. The fund is referred to as the “operating fund.” The operating fund is the accounting mechanism used to record operating costs, UC recharges and income. For sales to non-UC customers, a revenue account code will be established. A revenue account code is also referred to as an “income account” and generally is a 5 in front of the fund number. Recharges are income received from charges for sales and services to campus departments or other UC campuses. For University financial reporting, a recharge is considered to be cost redistribution. Therefore, it appears as a credit in the expenditure account code 693900. Expenditures for the operations are recorded in the Index, Fund, Organization, Program (xxx030) codes using appropriate expenditure account codes that categorize the type of expense. For cost of goods sold expenditures, activities must use program code xxx070. The cost of goods sold program codes are used to separate expenditures for re-sale vs. operating costs of the activity. A specific expenditure account will be established if departments will be processing recharges. An index code will be associated with the above COA elements, a.k.a. IFOP = Index, Fund, Organization and Program codes.

A rule class is generally established for a recharge activity as a mechanism to record recharges.

A budget must be established for each service enterprise activity in accordance with campus budget procedures. Generally, the department prepares a transfer of funds. The department will also request a “BD” index to be set up by the Budget Office.

A differential income reserve fund is the accounting mechanism used to segregate and accumulate overhead cost recovery (differential income rate) from sales of goods or services to non-University individuals or entities. A differential income fund (75xxxx) may be established if it is expected that sales to non-UC users will be made. A differential income fund is not allowed to have a deficit balance.

A Renewal and Replacement (R&R) reserve fund (76xxxx) will be established if equipment is involved. A R&R fund is the accounting mechanism used to segregate equipment cost recovery funds from the operating fund, by means of recording depreciation expense. The R&R fund is established once the activity is approved by the Recharge Rate Review Committee. An equipment plant fund will also be established which is the operating fund with a 9 as the last character, e.g., 640009. Reserves are accumulated to replace equipment to ensure that the facilities are operated on a continuous basis. The funds may be used to replace or upgrade the inventorial and non-inventorial equipment in the activity but may not be used for operating costs of the activity or for the operating costs of any other recharge activity. Equipment is recorded in the R&R reserve funds using the appropriate expenditure account codes. Expenditures for salaries, benefits and travel are not allowed. An equipment R&R reserve fund is not allowed to have a deficit balance.

Depreciation expense is a periodic charge for the cost of equipment. The transfers to record the depreciation expense begin when the equipment is put to use in the approved recharge activity. Equipment cannot be fully expensed in the operating fund in the year of acquisition. Depreciation will be on a straight-line basis over the remaining life of the equipment unless it can be demonstrated that some other method is more appropriate. The life of the equipment normally should be based on the UCOP useful life table. Depreciation costs are to be included as a cost element for rate determination purposes.

Any inventorial equipment, including gifted equipment, lease purchases or equipment purchased from another unrestricted fund, assigned to the activity, other than that furnished by the Federal government, will be depreciated. Federally-funded equipment cannot be depreciated and cannot be included in the costs basis for UC customers. Recharge activities can, however, create a rate for non-UC users that includes the federal depreciation component in the rate. Activities can then depreciate the federal equipment for non-UC users only. In this scenario, there would be two rates: 1) for UC customers (recharges) that does not include the depreciation component in the rate and; 2) for non-UC customers (income) that does include the depreciation component for federally funded equipment.

In certain circumstances, the equipment depreciation may be waived. The waiver can only be applied to the rate for UC customers. A rationale for the waiver must be provided as part of the proposal. The Department Chair/Administrative Unit Head must approve prior to submission to the Recharge Rate Review Committee.

With Vice Chancellor approval, the R&R funds can be used to purchase equipment for another self supporting activity or equipment for other departmental activities. With approval of the cognizant Department Chair or Administrative Unit Head, equipment may be purchased by other unrestricted funds.

A discrete custodial code for the activity will be established for inventorial equipment purchases. The code can be obtained by contacting the Equipment Management Office. If the equipment is in the department's primary custodial code, an interdepartmental transfer will need to be processed to transfer the equipment to the activity's new custodial code.

During the year, the cash balance of all UC funds participate in the Short-Term Investment Pool (STIP). Distribution of the interest earned (surplus balances) or charged (deficit balances) will be in accordance with the procedures in Business and Finance Bulletin A-60, Short-Term Investment Pool Distribution of Income. Current campus procedures dictate that the STIP be recorded in the respective Vice Chancellors' STIP funds.

There may be specific fiscal closing entries that are required. An instruction document is prepared each fiscal year, “Recharge & Other Income-Producing Activities Fiscal Closing Special Items Instructions”. The document is available by the end of April. All Service Enterprise activities must refer to this document for entries that may be required for the activity.

When an activity is no longer in operation, notify the BFS-GA contact to coordinate the closing of the fund(s). The funds need to zero-out prior to inactivating the index and numbers. If the activity had a Renewals and Replacement Reserve fund and/or Differential Income fund, those balances have to be zero and the funds and index numbers need to be inactivated. It is imperative to close the funds to avoid additional charges. In addition, if the activity has balance sheet accounts, such as credit card clearing accounts or accounts payable accounts, those accounts must be cleared also. The remaining inventory of an activity that is to be closed should be transferred at cost to another departmental activity or transferred to surplus sales in accordance with campus policy.